What is an NBFC?
An NBFC (Non-Banking Financial company) provides similar services as a Traditional Bank except issuing on Demand drafts and cheques. NBFC mainly provides financial services to individuals and Businesses. The principal objectives of Non Banking Financial Company to provide loans and advances, working capital loans, Personal loans, Investment in shares, debentures and other stocks issued by Government or other local authorities, insurance business, leasing, hire-purchase or offering Market Place Lending (P2P) Platform.
In general, NBFC is meeting the gap in financial needs for the organized and unorganized individuals and business. In the recent times, banks are focusing on Mid-Size loan to SME/MSME and Large Corporate as well to selected individuals with excellent credit scores where in case of Loan from the bank is against collateral or income. This gap creates an opportunity for NBFC to enlarge its presence in the financial market.
NBFC Provides quick loan services in comparison to the bank, this is the reason NBFC is growing faster than traditional Bank and RBI is also encouraging the NBFC to come into the financial sector and work for financial inclusion. Developing Countries like India, where less than 1 in 10 people have a documented credit history. Indian Fintech Start-ups have been using alternative credit scoring model to approve or reject the loan application. NBFC registration and further Operations of financial services are regulated by the Companies act 2013 and RBI Act 1934. The Reserve bank of India is the supreme regulator of NBFC in India. Credit growth of NBFCs is recorded at 24.3% per year as against 21.4% for banks.
What is the NBFC Registration?
If you are planning to start a finance business, the 1st Step is to incorporate a Private Limited Company or Public limited company under Companies act 2013. After Company formation, and Bank Account opening, there is a need to create a fixed deposit of Rs. 20 Million and approach NBFC-COR Division of the RBI. Application for COR must be filled in the prescribed manner.
The Designed officer of RBI will conduct proper due diligence and proper examination of the founder's backgrounds, verification of shareholder's profile and source of fund. If everything is clean and as per the satisfaction of RBI COR Committee, then within a time frame of 90 to 120 days, RBI may issue Certificate of registration or NBFC License. Non-banking financial company shall not commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration or NBFC License issued by the Reserve Bank of India.
What are the Types of NBFC in India?
By nature of the activity, they undertake, NBFC License can be categorized into the following:
- Asset Finance Company.
- Investment Company.
- Loan Company (Most Popular).
- Peer to Peer Lending Marketplace.
- Infrastructure Finance Company.
- Core Investment Company.
- Micro Finance Company.
- Mortgage Guarantee Company.
- Housing Finance Company.
- Core Investment Company
What are the Categories of NBFC in India?
By Deposit following Classification
- Deposit accepting NBFCs (Type -1)
- Non-Deposit accepting NBFCs (Type -2)
Note – Currently is not issuing NBFC license/ COR for Deposit-taking NBFC.
What is Deposits Taking NBFC?
Deposit-taking NBFC is a type-1 NBFC, is eligible for accepting Public deposits 1.10 time of its Net worth subject to prior approval from the Reserve bank of India. 2 years ago the Deposit-taking NBFC Registration was very popular. RBI has experienced that small companies who obtained the NBFC License for accepting Public Deposit have defaulted in the repayment of deposits. In the past 2 years, RBI strictly views and industry have experienced close watch over the operations of the NBFC-D.
In Public interest, and preventing deposit-taking NBFCs to not misuse the NBFC License issued by RBI, there have been certain Strict limitations imposed and conditions specified, for accepting deposits by the NBFCs. In our Opinion, RBI may not grant new NBFC License or Substantial Change in shareholding in the Existing NBFC-D.
What is the NBFC Registration Procedure?
RBI has simplified the NBFC Registration Process after 2016, in the recent few months RBI has issued more than 100+ new NBFC License to the entrepreneurs.
RBI is a completely autonomous body, the DNBR has transparent assessment process. Hence, during the NBFC registration process, if they noticed need of any additional documents they will email you or send you a formal notice, within 30 days, you must respond to their query.
If you are genuine enough then you can expect NBFC license in 90 to 120 days. Before the filing of Application for COR (Certificate of registration), You can follow the following indicative checklist. For further details, you are requested to carefully read the RBI Circular.
- Select a Consultant with Minimum 10 years of Experience in NBFC & Banking laws
- Scrutinize the Consultant past experience, the Firm must have a team size of 50 to 100 with Combination of professionals like CA, CS, Lawyer, and Senior Banker.
- Ask NBFC Consultant to give you the minimum 3 references of clients who have obtained NBFC License in previous 2 Months.
- Avoid New/Small Law firm / Accountant firm or Local Consultants
- After Adequate verification, Sign SLA (Service level agreement) with a reputed CA/ Law Firm / Banking Advisory firm
- Ask NBFC Consultants to register a Private Limited company or Public Limited Company
- Open a Current account with a Scheduled commercial bank
- Ask NBFC Consultants to Create a high-Level Business plan for the NBFC (Financial projections for sixty Months). The NBFC business Plan must contain a comprehensive analysis of the loan product, Lending process, Market research, SWOT analysis, Founders Profile, Credit Risk and Assessment model.
- Create Fixed Deposit of Rs. 2 Cr / 20 Million and such Fixed Deposit shall be held in your bank A/c for the assessment Period or until you clear the eligibility process of NBFC License. The timeline for NBFC Registration may be in the range of 90 to 120 days. As soon NBFC License is granted by the RBI, you can break the Fixed deposit held in your bank Account. Over the Life of NBFC, the Minimum net owned fund Rs 2 Cr. must be maintained.
- Ask NBFC Consultants to submit the online COR application on RBI's website (COSMOS)
- NBFC Consultant will scrutinize all documents before physical submission of documents to RBI. Even a single mistakes or false submission of facts/ Documents in Application may lead to rejection of your application for COR.
- Physical Submission of COR application to RBI’s NBFC COR Department along with all supporting documents
- The Designated officer from Department of Non-Banking Regulation shall correspond you via email or Written Notice for additional submission of documents
- You need to respond/ Reply to RBI Notices from the time to time
- The NBFC license may be granted by the Department of Non-Banking regulation only after vigilant inspection of the application, Shareholders, Founders, and documents attached to it.
What is Enterslice's SOP for NBFC Registration Advisory Services?
Enterslice is leader and Rank-1 in NBFC/IRDA/SEBI advisory services. We offer financial services advisory services in more than 22+ Countries.
- Please visit our website Fill your details like name, Email Id & Mobile No – Click on Get Started button.
- Please wait for a Call back by an NBFC Expert or pay online if you are clear about the NBFC Registration process
- Our Expert Will call you within 4 to 8 Working hours and if you have further questions, someone from senior management will speak with you on Skype. You can email your question to email@example.com
- Sign SLA (Service level agreement) after due discussion with the team.
- After understanding your profile and Capital structure team of Enterslice will share a detailed checklist for your necessary review and further action.
- You will receive unique order Number to track the progress of the assignment
- Upload documents by use of Mobile apps (Enterslice Mobile app is available on Android and Apple App Store). You can also email your documents to firstname.lastname@example.org
- We assign a small team of 4 people on each assignment with Combination of Professionals like CA, CS, Lawyer, and Senior Banker.
- Track the order status on our website or by use of Mobile App
- We will send regular updates via email about the work progress
- Our team will handle end to end process like Company formation, Business plan Creation, Application drafting and assist you by replying to you or RBI notices until you get the NBFC COR.
- For Order status, please write us on email@example.com and for Feedbacks/Complaints write to firstname.lastname@example.org
What is the NBFC Registration/NBFC License Requirement?
Before the filing of Application for COR with RBI, you need to understand what are the documents required for NBFC registration or NBFC license.
- Register a Private Limited Company/ Public Limited company
- The Middle name of Company Must be Finance, Finserv, final, Investment, Capital Fintech, Leasing e.t.c
- The object clause in the MOA clearly depicting the financial/Investment business.
- Obtain a Certified copy of Certificate of Incorporation, MOA & AOA from the Regional registrar of companies
- KYC & Income proof of Directors and shareholders
- CA Certified Net worth certificate of Directors, Shareholders, and Company
- Obtain a Banker report about the no Lien remark on the Initial Fixed deposit of Rs 2 Cr / Rs 20 Million.
- Appointment of an experienced chartered accountant in practice as Auditor of the applicant company
- Submit highest educational/professional qualification of the directors of the Applicant company
- Credit report of Directors and shareholders
- Submit at least one Director's profile with 10+ years of Senior management experience in the Financial Services Sector Like NBFC / Bank. The technical director may be a Non-Executive Director or Executive Director.
- Submit a clean Bankers report of the applicant company, Directors, Shareholders depicting details of deposits and loans balances as on the date of application
- Verify Credit rating report of Directors and Shareholders, they should not have any default in repayment of the loan or financial facilities over the life. In case delay in repayment of a loan, with proper clarification RBI May accept the application for COR.
- Source of the fund for initial capital Rs. 20 Million / Rs. 2 Cr Must not be a borrowed capital
- The Applicant company should have a high-level business plan to prove the need for NBFC License
- Submit a detail action plan about the Loan products, Fair Practice code, Credit and Risk Assessment Policy
- Organizations structure and decision-making process for approval/Rejection of a loan application
- Submit Information technology policy in case you lend via the use of FinTech based lending model
- Submit a declaration about No default or conviction under NI/CPC/CrPC /FEMA/PMLA
- Submit a true copy of Audited Balance sheet and Profit & Loss account along with directors & auditors report of at least 3 years of Holding company (Required in case applicant is the subsidiary of a Private Limited company or Public Limited company or foreign company)
- In case of FDI, Necessary FDI Compliance as per FEMA Act must have complied
Disclaimer – Above the list of documents have been discussed based on our experience may or not as per RBI Circular.
How Are NBFCs different from Banks?
NBFCs provide financial services similar to banks but they are more concentrated on an unorganized sector of the society having low or no credit rating score.
The other differences are:
- NBFCs are barred to accept demand deposits, however, they can accept public deposits after getting NBFC Deposit-taking license from the RBI. Currently, Deposit-taking NBFC License is not possible in our view.
- NBFCs are not entitled to issue cheque drawn on itself as they do not form part of payment and settlement system.
- Credit guarantee and insurance facility are not available to depositors in case of NBFC.
Why do I go for fresh NBFC Registration Instead NBFC Takeover?
Applying for fresh NBFC License Application is always a better option, after 2016 RBI has simplified the process of NBFC Registration and especially for foreigner companies who intend to enter into the Indian Financial service market, We always advise them to apply for fresh NBFC License Application instead acquiring the existing one.
Advantages of fresh NBFC Registration
- Low Legal Risk - If you are applying for fresh NBFC License Application, no need to worry about the Past Non-Compliances. In case of NBFC Takeover, Any Past Non-compliance with RBI Act may lead to cancellation of NBFC License.
- Timeline - Fresh NBFC Registration can be completed in a period of 90 to 120 days with 90 % to 95% Success ratio at overall in our experience. At the other side, NBFC Takeover takes 5 months to 12 months time. In case you are a foreigner after Nod from Department of Non-Banking supervision again you need to apply for permission before the Foreign Exchange department of RBI, which again may take minimum 3 months’ time. At overall acquiring an NBFC by foreigner takes 12-15 months’ time and acquisition by Indian Shareholders may take about to 5 to 9 Months. In our experience, only 30% Takeover Deal was successful in past 5 years.
- Title Risk – There is no title risk of Ownership after New NBFC Registration as you are the 1st shareholder of the company at another side in acquiring an existing NBFC, you will not able to establish the clear title of shares. As in 80% NBFC takeover case, we have experienced that target company has no documentary evidence about the transfer of ownership. Merely equity shares were transferred to ROC Records. The Share transfer deed has not been executed.
- Tax Liability – There are no assets held by newly incorporated company hence there is no short term or long term gain but at another side, if you are acquiring existing NBFC, you need to prepare for future Capital gain liability, Penalty from Registrar of companies etc.
- Capital – In the case of fresh NBFC License application, you may need to block your Rs. 2 Cr / Rs. 20 Million FD in Bank Account and definitely you will earn some amount of interest in it. At another side, in a case of the takeover, the proposed shareholders are required to submit the Bankers report stating the Bank Balance equivalent to book value of the shares.
What are the NBFC Registration Fees?
- For registering a Private Limited company with Capital Rs. 2 Cr, you will require to pay a government fees Approximate Rs. 3,50,000 ($ 5000 to $ 6000 ).
- Need to hire highly experienced consultants that may cost you on average Rs. 7 to 8 lac, the advisory firm should be eligible to help you in building the business, merely NBFC license is not sufficient. You need an advisory who can help you raising fund.
What are the NBFC compliances after COR?
After you successfully complete the NBFC Registration Process and from here need to follow the RBI Guidelines, Circular, and notices published in the public domain from time to time.
- Need to obtain membership from all four Credit rating agencies (CIBIL, Equifax, Experian and CRIF Highmark), if you are willing to have credit scoring from API, Please use Equifax.
- Apply for E-KYC Registration & Regular reporting of the borrowers.
- FIU Registration.
- Secretarial compliances.
- Statutory Audit.
- Tax Audit.
- Income tax Returns.
- ROC Returns.
- Filling of NBS-9 by use of Online Platform of RBI (COSMOS).
What are the supports or Services will I get from Enterslice after Certificate of registration from RBI?
- Advisory for Fintech Based Credit Assessment model
- Assistance in SOP of the Organization
- Assistance in designing your loan product
- Helping founders in preparing to Go to market strategy
- Assistance in drafting / Reviving agreements/Contracts as required to operate the NBFC.
- Finalizing reporting formats from various verticals of the organization
- Guidance on Digital Marketing and support in achieving lower customer acquisition cost
- Assistance in designing Company Policies (HR, Credit, Risk, Delinquency management & Recovery)
- Development of High-Level Business Plan
- Warm Introduction to venture capitalist for Series-A Investment in the company
- Assistance in fundraising process via FDI Automatic route
- Advisory on Adoption of Ind-AS
- Internal Audit Services
- Virtual CFO Services
- Assistance in meeting Secretarial compliances
- Assistance in meeting RBI Compliance
- On-Demand Service of independent director
Who are the Regulatory for Fintech In India?
- RBI is a Top regulator for Financial inclusion, Payment business, PPI, Payment processing, Alternative banking, P2P, Forex & online lending business model
- IRDA is the regulator for Insurance web aggregator and other insurance-related Business
- SEBI is the regulator for Robotic investment advisory
Why is NBFC Good Choice for Fintech Startups?
Traditional banks are operating as a classic business model like – Brick and Mortar branch’ this cost a lot in the opening and running a branch. At another side NBFC with Fintech Business model, they operate from one office and focusing on the digital presence and entire customer acquisition is either online or Application sourcing from DSA (Direct selling agent). You can apply for NBFC License with a Net owned fund Rs. 2 Cr / Rs. 20 Million.
NBFC in India are primarily focused on meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.
The Bank has slow loan processing as compare to NBFC. Non Banking Financial Company has quick loan sanctioning process. If a person applies for Loan from NBFC the paperwork is less as compared to a bank. Because NBFC deploys alternative data points to assess the loan eligibility of the applicant. Hence, credit decisions are very fast in NBFC.
What is Core the function of Fintech based business model?
- Addressing mass problems and Customer acquisition process
- platform based, modular, and focusing on the Mass need
- Actively shaping customer behavior, Attracting user for an online loan
- Working on financial inclusion – app based loan in 30 minutes
- Creating space for the alternative digital banking system
- Disrupting conventional business models facing significant legacy issues;
- Use of Big data, AI & Machine learning tools to minimize the fraud
How Fintech Enablement by the RBI?
UPI: the “Unified Payment Interface”, commonly known as UPI, holds the potential to bring the much-needed revolution in the in the digital payment systems thereby leading towards a cashless economy
- Security/Biometrics – Aadhar based payment system
- Wealth Management
What is Peer to Peer Lending Marketplace?
- Initially, RBI was against P2P Business model, As in China it has a very negative result. But in interest of Community RBI has issued a consultation paper in 2017 and after feedback from industry has been taken into the consideration. Finally, in Oct 2017 RBI has issued some detailed guidelines for peer to peer lending license in India.
- P2P Lending Marketplace regulation came into the picture from Oct-17, P2P Will require to register as NBFC. The investor will in invest in escrow A/c, EMI/ Recovery everything will be routed throw Escrow A/c.
- The Key Challenges in this model is to set a recurring payment recovery system from escrow A/c to Investor A/c, P2P NBFC A/c. This requires a high level of data capturing system and use of Machine learning will be required to prevent the fraud in the online transaction.
What is the Alternative Lending Model?
Large no of NBFC’s has adopted the ALM. This is the biggest attraction of the community towards NBFC, the borrower prefers to reach NBFC for their loan requirement instead of a bank.
Alternative lending consists of P2P lenders, market platforms, digital lending platforms etc.
The attractive features of the Alternative Lending Model include:
- Technologically driven;
- Highly efficient customer acquisition;
- Relatively Light touch regulatory environment;
- Straightforward approval and servicing activities.
On the other hand, the features of most Indian Banks, Financial Institutions and NBFCs include
- Physical branches operating expenses;
- Significant Regulatory Overheads;
- Tedious collection and recovery functions;
Know Alternative Lending before You register an NBFC?
- Low Operation Cost - Fintech based NBFC - Extensive Use of the technology and IT Infrastructure hence operating cost (Salary & Infra cost is lower than traditional NBFC)
- Unlimited Reach - Fintech NBFC have been targeting a customer demographic who were outside the scope of the traditional banking system.
- Higher ROI - Fintech based NBFC has higher fund cost as Compare to Bank, however, enjoys a lower customer acquisition cost and Lower servicing cost than the bank.
- Lower NPA than Bank - Fintech based NPA has higher NPA compare to banks. But ROI is much higher than a secured lending model. Alternative lending business has 2 times better profit than Traditional Lending.